07 Feb 2011: Analysis

Why Does Energy Efficiency’s Promise Remain Unfulfilled?

Among the many measures the world can take to wean itself off fossil fuels, few match the benefits of making homes, business, and cars more energy-efficient. But financial and psychological barriers have kept individuals, businesses, and governments from realizing efficiency’s great potential.

by jon r. luoma

In 2006, Paul Rak, president of VeriForm Inc, a Canadian steel fabricator, set his company on the kind of do-gooder mission that could have given his corporate accountant fits. Rak had just seen Al Gore’s climate change film, An Inconvenient Truth, his first child had recently been born, and Rak decided he was obliged to find ways to deeply cut his company’s greenhouse gas emissions, even though he knew it was going to cost plenty.

It turned out the company accountant had every reason to relax, even smile. Doing good quickly turned into doing well.

Over the next two years, VeriForm installed more efficient lighting, automated its heating system, and found ways to run its saws and other tools more efficiently. Rak says he was floored by how quickly the resulting energy savings dropped right to the company’s bottom line. Between 2006 and 2008, he told the trade magazine Green Manufacturer, he spent about $46,000 on energy efficiency, an investment that immediately began returning about $90,000 in reduced energy bills annually, a nearly 200 percent return on the investment. Meanwhile, VeriForm had cut its energy costs by 58 percent and its greenhouse gas emissions by 233 metric tons per year. Today, Rak continues to avidly pursue energy efficiency at his company, an effort that this month earned him a $100,000 award from the Canadian government.

That a company, or a household, can make such an energy leap shouldn’t come as a surprise. What is surprising, though, is that more businesses and individuals aren’t embracing energy efficiency measures, given the significant savings that come from steps as simple as changing

An investment of $500 billion in efficiency would end up saving $1.2 trillion in energy costs.

light bulbs, adding insulation, or installing smart electric meters.

That efficiency programs offer a huge opportunity to slash energy use is no longer in doubt. In the U.S., a pair of high-powered analyses, one by the prestigious National Research Council (NRC) of the National Academy of Sciences, another by McKinsey & Co., a global consulting firm, came to a remarkably similar conclusion: opportunities abound to save energy and reduce carbon dioxide emissions though improved efficiencies.

Wind and solar might get more attention as energy alternatives. But the National Academy and McKinsey reports, both published in 2009, suggested that plain old efficiency had at least as much potential to deliver a rapid carbon-cutting wallop. Both analyses said that within a mere 10 years, the U.S. could cut total energy use by 20 percent or more. As an added benefit, the energy savings could be served up with a side of fiscal dessert: An investment of $500 billion in efficiency would end up saving $1.2 trillion in energy costs, said the McKinsey analysis.

Even more recently, a team of researchers at Cambridge University estimated that the world could save 73 percent of its energy through efficiency measures. Much of that gain could come from deploying basic, already-available technologies such as thicker building insulation and triple glazed windows. (At least one idea seems more far-fetched: limiting automobile weight to 300 kilograms, or about 660 pounds.)

During his presidential campaign, Barack Obama touted efficiency as “the cheapest, cleanest, fastest energy source.” Last week, President Obama set a goal of improving U.S. energy efficiency by 20 percent over the next 10 years through a series of tax incentives and grants. Still, efficiency seems to get far less attention than it deserves. If companies like Paul Rak’s can so easily prove efficiency’s merits, why isn’t everyone on the bandwagon?

To be sure, there has been progress. Since the oil shocks of the 1970s, the developed world’s heavily energy-dependent industrial sector, in

‘It’s a myth that the wealth of a country is proportional to its energy use,’ says U.S. Energy Secretary Steven Chu.

particular, has figured out that using energy more efficiently makes financial sense. According to the American Council for an Energy Efficient Economy (ACEEE), a Washington D.C. based advocacy group, the U.S. would be consuming 80 percent more energy than it does now if it was using as much energy per dollar of GDP generated in 1975.

U.S. Department of Energy Secretary Steven Chu points to data like that as proof that “it’s a myth that the wealth of a country is proportional to its energy use.”

Some major corporations have announced large efficiency gains recently. Skeptics raised eyebrows when retail giant Wal-Mart announced in 2005 that it would turn heavily to efficiency to help reduce greenhouse gas emissions, but the company quickly began investing as promised. One early program to install cooler, high-efficiency LED lights in its miles of frozen food displays has bloomed into initiatives to replace ceiling and parking lot lights at 650 stores, at energy savings of up to 70 percent. (The company says lighting is its second-biggest operating expense.) New stores are being built with features that include day-lighting and heat-reflective white roofs, and the company has deployed a scattering of hybrid diesel trucks.

General Motors announced last month that it had found ways to derive huge savings simply by coordinating the on-off cycles of conveyor belts with lighting and energy-hogging features like compressors and heaters in its manufacturing plants, using software developed by General Electric; the annual energy savings will be up to five times more than the cost of implementation, GM said. (The idea: lights and energy-sucking equipment switch on only minutes before employees arrive at work stations.)

Tech giant Google claims that its push for efficiency means that its own giant data centers use only half the energy of a typical data center, and other large corporations from DuPont in the U.S. to Germany’s Siemens claim to have made giant and highly profitable efficiency strides.

Still, the 2009 studies and other research make it clear that consumers, and even many bottom-line driven businesses, are continuing

‘People do not always make decisions based on what makes economic sense,’ says one expert.

to miss what should be clear opportunities, even when they could nicely fatten corporate or personal wallets. Consider, for example, that home and business owners continue to resist taking actions as cheap and simple as caulking leaks, switching to compact fluorescent light bulbs, or making wise appliance choices, despite the fact that government programs like “Energy Star” labeling help take some of the guesswork out of decisions.

R. Neal Elliott, director of research at ACEEE, says that one clear message that has emerged from his group’s 30 years of efforts to promote efficiency is that “people do not always make decisions based on what makes economic sense. The myth of the rational consumer is clearly that: a myth.”

As Elliott himself acknowledged, there are ways to explain at least some of what looks like economic irrationality. The McKinsey report highlighted several of these.

Start with sheer consumer ignorance about what savings efficiencies can achieve, or skepticism that projected savings will materialize, or simply that people have other things on their minds. Sometimes it’s a sort of false miserliness, a reluctance to invest money up front, even if the money is an investment that will quickly be paid back. Of course, even a consumer or business well aware of cost savings might simply not have enough cash or credit to make an up-front investment.

Other factors are more complex. In some cases, it’s a matter of “split incentives”: a landlord who sees no benefit in investing in, say, insulation, or a more efficient furnace that will benefit to tenants economically. Tenants, likewise, have little incentive to make improvements to a structure they don’t own. A homeowner who plans to move on might have little incentive to invest for the benefit of a future buyer, at least not unless that future buyer can be counted on to shell out extra cash, knowing that rewards will come in the form of reduced future operating costs.

Since the energy crisis, California's use of electricity has remained flat, even while its economy doubled.

have plenty of information about costs and benefits. They suggested that these sorts of anomalies have implications for energy policy, including whether carbon taxes or carbon trading programs will have has much effect on behavior as advocates hope. It turns out that much of the problem is simple procrastination — of busy people intending to take action, but putting off until endless tomorrows what isn’t an urgent need that day, or the next, or next. Another is a persistent “endowment effect,” an apparently deeply embedded human urge to simply stick with the current status quo.

An approach that does tend to counter these all-too-human quirks is a “soft paternalism” that preserves individual choice, but defaults to the most beneficial one. For example, automatically placing all new employees in defined contribution retirement plans, with the choice of opting out, is a proven way to boost participation. In terms of energy efficiency, it could mean tactics as simple as requiring that new computers, mobile phones, or video game consoles default to their energy-saving modes. (Some game consoles, in a default always-on mode, become energy hogs that use more electricity than the family refrigerator.)

A blunter instrument, the outright regulatory mandate, also has its admirers. Chu likes to point out that simply as a result of years of repeated tweaking of refrigerator energy-efficiency standards, the U.S. is now saving more energy than all of the nation’s wind and solar power is producing, even though the cost of refrigerators has dropped on an inflation-adjusted basis.

That some utilities are now motivated at all to discourage energy consumption has itself been a sea-change. Under traditional business models, it made no more economic sense for utilities to reduce the volume of product sold — kilowatt hours, or units of natural gas — than it made for makers of soft drinks or shampoo to sell less of their products.

California became the first state to confront that issue in 1982, when, in the throes of the energy crises of that era, it found a way to decouple profits from the amount of energy used, allowing the utilities to encourage efficiency while guaranteeing a profitable return. Utilities, essentially, were allowed to charge more for each unit of energy, as long as efficiencies improved.

The state seems to be a model for what’s possible, at least in the view of Chu, who points out that since the energy crisis, the state’s use of electricity has, remarkably, remained flat on a per capita basis, even while its economy doubled. Electricity consumption in the rest of the U.S. meanwhile went up 40 percent on the same per capita basis. Some version

Recent data suggests European Union nations are on track to reach only half their energy efficiency goal.

of decoupling is now in place, although sometimes only on a limited pilot basis, in at least 18 other states.

Internationally, China’s official Xinhua News Agency claimed last month that the nation had achieved a five-year target of reducing energy consumption per unit of gross domestic product by 20 percent. Impressive perhaps, but it also turns out that in a final sprint to reach that goal in the last half of 2010, the government ordered a shut-down of about 2,000 heavy industrial facilities, including steel and cement plants, imposed rolling blackouts, and even ordered some street lights turned off: not exactly the sort of tactic that would win elections in Western democracies.

Meanwhile, an efficiency push by the European Union has hit some snags. Four years ago, member states agreed, in a non-binding resolution, to deploy efficiencies to reduce energy consumption by 20 percent by 2020. Even though the member nations appear to be on track to hit a similar, binding goal of producing 20 percent of their electricity from wind and solar power, recent data suggests they’re on track to reach only half their efficiency goal.

What’s on the energy efficiency horizon? ACEEE’s Neal Elliott says “smart” will be a linchpin in future efficiency progress. That starts with a move, now underway, to smarter regional and national electric power grids, including robust power systems that can interact, via Internet-like digital communication, with end users.

At a basic level, a smarter grid means that a meter can offer consumers real-time information about electricity costs, which tend to soar at times of peak summer demand. But, says Elliott, “We’ll start seeing the real benefits when we start putting smart meters on smart homes filled with smart appliances.”

That might mean a refrigerator that “knows” that the dark of night is a far better time to make ice than the middle of a hot summer day. Similarly, the charging system for an electric or plug-in hybrid automobile could turn itself on in the morning’s wee hours when demand and rates are low.

How significant would it be if America’s 29 million small businesses increased their energy efficiency and reduced their emissions? Judging from the example of one California entrepreneur, the impact could be far greater than you might expect.READ MORE

On a more nuanced level, says Elliott, it means that appliances will even be able to predict patterns of household or business energy demand. “If it’s the middle of a weekday, and your refrigerator has learned the door isn’t likely to be opened because no one’s at home, maybe it can just cut back on the compression cycle,” says Elliott.

A smarter grid will also mean valuable information can be fed back to power generators. To prevent outages or brownouts, especially during times of peak demand, utilities today are left guessing just how much they have to crank up older and more-polluting power plants. More robust, real-time feedback from electricity consumers will mean utilities can more accurately fine-tune supply to demand, trimming generation now wasted on maintaining a margin of safety. The two-way interaction would mean that a utility can offer customers incentives to agree to participate in trimming peak demand by, say, allowing the utility to remotely cycle down a household’s central air conditioning for a short time.

The stakes are hardly small. According to the U.S. Department of Energy, making the grid a mere 5 percent more efficient would equal permanently eliminating the greenhouse gas emissions from 53 million cars.

COMMENTS

Thank you for the article. While California's example of energy use which has remained flat is truly remarkable, this is not the norm unfortunately. There can be many rebound effects in the bigger system, if the savings that we get from these efficiency measures get lost somewhere else. A good way to measure how efficient we are in our energy consumption on a big scale is the calculation of the CO2 emissions per pound (or dollar) spent. It gives an idea of the energy intensity embedded in every dollar we spend. I believe it is important since if we gain some savings but we spend the money we saved in a very energy-intensive way, we would have been better off if we didn't save our money in the first place. Example: with the 400$ per year that I save on my energy bills, what do I do? What if I use them to buy a cheap return flight within Europe? I have made some progress when I look at my bills, but my overall emissions are higher than last year. I believe that linking our overall money expenditures with indicators of carbon (or energy) intensity could help us to get the big picture. Cheers.
Marco

Posted by
eccemarco
on 07 Feb 2011

I would like to see data of efficiency upgrades throughout the country compared to utility rate increases. Just recently, our local utility raised its rates, simultaneously sending a letter to all customers explaining the reason for the increase. They openly admitted that one reason for the increase was reduced consumption.. another reason was to help pay for the production of renewables (to meet portfolio standards), which typically costs more than conventional fossil fuel energy production.

How are energy efficiency measures, resulting in reduced consumption, affecting utility rates around the country? Is the previously mentioned example happening similarily throughout the country? Is this another obsticle pushing energy users away from investing in energy efficiency measures?

Posted by
Joe
on 07 Feb 2011

Jon, a terrific article. You covered many bases, and in another context, I might be inclined to think, we'll get more energy efficient some fine day.

But since we hear a ticking clock while more GHGs enter the atmosphere to stay there for a century as they warm the planet, some fine day is not enough.

Absent laws that are effective in changing the bottom line about the mandatory performance of every building and business and what everyone must find a way to pay for, it is hard to see when energy efficiency will become the widespread new normal. Maybe it will be too late.

Posted by
Sallan Foundation
on 07 Feb 2011

Not to be cynical, as I'm all in favor of energy efficiency, but sometimes I think that being efficient in energy usage just leaves more fossil fuel for the 'commons'. China and India continue to import more and more coal and oil- China is even purchasing rights to shale oil in the US (Chesapeake Energy).

Regarding the US, we can become more efficient, but growth will offset the savings. Take your example that we are 80 percent more energy efficient per $ of GDP than in 1975: the GDP in 1975 was $1.6T vs the current $14.5T. Doing the math we still use about 5 times more energy than we did in 1975.

The bottom line is growth is growth is growth. Until we figure that conundrum out, its difficult to break even at best.

Posted by
John Dyer
on 07 Feb 2011

This is a great article, thank you for writing it.

When you were talking about "split incentives" above, your example of the landlord/tenant relationship makes the problem quite clear. My frustration with these "split incentives" is that just because the motivation is lacking, it doesn't mean that the benefits are any less.

How can we make the step from simply being disappointed that people aren't incentivized to getting them to realize and share the costs for efficiency measures. I don't know the answer (simply saying that something is "energy efficient" probably isn't enough), but it seems to me that some creative strategizing could help break through some problems like this.

The space looks ripe for innovations that will benefit everybody involved.

I wrote an article about using environmental issues as catalysts for innovation. Take a look at it if you are interested in such things: http://www.businessearth.com/adopting-sustainable-approach-business-lead-innovation-competitive-advantage/

Posted by
Bradley Short
on 08 Feb 2011

I think energy efficiency is still far from the typical mindset of the average citizen. How many times do we leave the house with the lights/TV on? It is necessary to educate the consumers to be conscious about utilities. A good way to do that is to show them (in everyday terms), what kind of savings little actions can generate. For example, even unplugging your cell phone charger after use can save you $1/2 per month.

You should check out www.poweringanation.org to see how our everyday lives can be more energy efficient (see "Energy Porttraits").

Luca Semprini

Posted by
Luca Semprini
on 08 Feb 2011

Making cars more efficient? That's rather like making fire less hot.

Automobiles are 3,500 machines that sit idle for 95 percent of their lives. Even if they were rendered twice as efficient as they are now, they would still be insane.

Posted by
Michael Dawson
on 08 Feb 2011

It is certainly true that energy conservation and efficiency can have huge benefits for our country, and should receive high priority for the U.S. in the short term, as we are very energy obese compared to most other nations.

However, we should not allow ourselves to think that conservation and efficiency will solve all of our problems. According to the EIA, by 2035, 86% of the global growth in energy demand will be in non-OECD nations. Most credible projections are that global energy usage will double or triple by 2050. And, the 2009 IPCC report states that global greenhouse gas emissions must be reduced to 85 percent below 2000 levels by 2050 to hold atmospheric CO2 at 450 ppm (which may not be a safe level, according to climatologist James Hansen). These figures assume significant deployment of conservation and efficiency.

Conclusion: We need essentially a carbon-neutral energy economy by 2050, so let's begin in earnest to deploy advanced nuclear power at scale. Nuclear power is the only fit-for-service technology capable of taking fossil fuel plants off line in this short time frame. If we're going to win the (energy) battle, let's make sure we don't lose the war.

Posted by
Gary Kahanak
on 08 Feb 2011

To John Dyer:

I bet you know of steady-state-economy advocates. I once found a good web site about it, but can't find it now. Meanwhile, there are some suggested links from the following:

http://www.frihost.com/forums/vt-116664.html

Posted by
TRB
on 09 Feb 2011

We cannot expect to transform the building energy consumption profile without transforming the way the occupants interact with it.

The failure of energy star homes, LEED Homes and conservation programs to produce their projected results have been shown in studies in the UK, USA and Australia to be due in large part to how the occupants, without the education about true conservation, continue with their habits of excessive consumption and undermine the efforts to design and or improve better structures and systems.

This is best described in the Jevons paradox, sometimes called the rebound effect, which states the proposition that technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource. I don't know why the Jevons Paradox concept is not taught (emphasized) to the engineers and designers of these various efficiency and energy improvement schemes. The failure to take the occupant (the Consumer) into account and build in an emphasis on conservation undermines the success of these programs/improvements.

I have often referred to the occupant as "the elephant in the room” that no one seems to want to talk about. The building occupants need help and educational tools/training to make a successful transition to a "Conserver" in order for real change to happen in the end.

Posted by
Jay
on 10 Feb 2011

Jay - well said re Jevons paradox. No one seems to mention this - even though it was first postulated about 150 years ago.

It's easy to see why this happens - all my electrical things are a lot more efficient then they were 10 years ago - however I have so many more of them.

Posted by
Chris
on 14 Feb 2011

Are the investor-owned energy utility energy efficiency programs being administered with purpose, effectively and efficiently using unemployed and small start up contractors to reduce consumption thereby reducing carbon emissions and ghg as is the intention of the government and those who advocate for social justice through stimulating meaningful job growth that will support families and rebuild the economy?

In the 90's investor-owned utilities practiced "gold plating strategies" in hiring consultant to advise and administer the programs using the public funds to compensate for lost revenues and distribute the funds within their "circle of trust."

Has anyone investigated these activities to confirm it is not happening today?

Specifically in Massachusetts where there are discussions about the PA and Lead vendors monopolizing the contracts.

Can you forward information on cases of impropriety if you know of any?

Posted by
John
on 14 Feb 2011

Thanks for the article Mr. Louma, I am a journalist from India who works for a renewable energy magazine. I have also been working on small residential campaigns to teach housewives about monetary benefits of energy efficiency but as you have mentioned it's the initial amount that becomes a barrier for financially hard pressed families to go for efficiency measure. So what we do is we tell them about small little usage habit changes that saves them money that can be later invested in funding their efficiency drive.

However, India's small and medium industry is one of the most energy inefficient sectors. My survey of these industries revealed that they have no incentive to adopt efficiency measures as most of their electricity is stolen from grid and efficiency is actually a costly substitute for them. So strict penalties can force them towards efficiency measures.

regards

New Delhi, India

Posted by
Keshav Chaturvedi
on 16 Feb 2011

I also feel concern by the Dyer's post on the incentivization of the people. I think that the saving of the energy doesn't come from the market but from the ethic. It is like nationalism. Nothing on the market told to the American people to go to war for our defense. That's why I very much rely on the move of the army which could be a very good ally for the ecologists as we can see in France with one of our political women called Segolene Royal.

Posted by
meleze
on 13 Mar 2011

Dear Jon,

Thanks for the fairly comprehensive update. I appreciate your digging into and clarifying this information.

As part of the picture you're drawing, you should know about a home weatherization program in Oregon and Washington – and, I believe, in other states, but I haven't done the research – that is being rolled out in a big way. My own home was weatherized under the program's 500-home pilot in Portland. It's called "Clean Energy Works."

The scheme is simple in outline. A homeowner receives "deep" weatherization that would otherwise be financially difficult or impossible (not to mention economically problematic in the way you analyze in your article) for him to obtain. The costs are amortized over 20 years by adding them to the utility bill. A bank was created to handle the financing, which was primed with a couple million dollars from the federal government. The homeowner gives a second mortgage to the bank.

About $20,000 of work was done on our house. This includes very thorough green insulation, a new heat pump with three room units, a new hot water and a new roof. The roof is not a standard provision, but was available to us because our house is small so that the total cost was under the $20,000 cap. The heat pump and water heater are very energy-efficient. The work took just a few days in November, and our electricity use has so far dropped about half.

A beautiful aspect of Clean Energy Works is that it creates living wage jobs—paying about $15 an hour plus good benefits. These jobs should turn into decent careers for those workers, because Clean Energy Works is being rolled out to the entire state. I don't have the actual numbers, but I've seen estimates of 100,000 homes in the state to be weatherized over the next decade.

Here's the web page: http://www.cleanenergyworksoregon.org/

Here's some street-level iintelligence from the Metropolitan Alliance for the Common Good (MACG) which lobbied hard to get the living wage jobs into the agreements governing the program: http://macg.org/currentissues/sustainablejobs/Sustainable%20Jobs%20News

Let me know what you think.

Sincerely,

Nick O'Connor (yep, the same – hello to PH and KG4!)

Posted by
Nick O'Connor
on 14 Apr 2011

Good post on Energy Efficiency Jon R. Luoma.

Energy Efficiency is the cheapest way to conserve energy compared to energy generation. As the saying goes, EACH KWH SAVED IS EACH KWH GENERATED.
In developing countries Enormous energy is wasted in Irrigation Electric pump sets(because of old and inefficient ones(,lighting(Still in many countries there is usage of Incandescent bulbs, in transportation etc.,
Efficient energy use, sometimes simply called energy efficiency, is the goal of efforts to reduce the amount of energy required to provide products and services. For example, insulating a home allows a building to use less heating and cooling energy to achieve and maintain a comfortable temperature. Installing fluorescent lights or natural skylights reduces the amount of energy required to attain the same level of illumination compared to using traditional incandescent light bulbs. Compact fluorescent lights use two-thirds less energy and may last 6 to 10 times longer than incandescent lights. Improvements in energy efficiency are most often achieved by adopting a more efficient technology or production process.
There are various motivations to improve energy efficiency. Reducing energy use reduces energy costs and may result in a financial cost saving to consumers if the energy savings offset any additional costs of implementing an energy efficient technology. Reducing energy use is also seen as a key solution to the problem of reducing greenhouse gas emissions. According to the International Energy Agency, improved energy efficiency in buildings, industrial processes and transportation could reduce the world's energy needs in 2050 by one third, and help control global emissions of greenhouse gases.
Energy efficiency and renewable energy are said to be the twin pillars of sustainable energy policy. In many countries energy efficiency is also seen to have a national security benefit because it can be used to reduce the level of energy imports from foreign countries and may slow down the rate at which domestic energy resources are depleted.
Dr.A.Jagadeesh Nellore(AP),India

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